Module 3 – The Adjusting Process

Learning Objectives:
1. Describe the nature of the adjusting process.
2. Journalize entries for accounts requiring adjustment.
3. Summarize the adjustment process.
4. Prepare an adjusted trial balance.

Learning Objective 1: Describe the nature of the adjusting process.

Nature of the Adjusting Process

 The accounting period concept requires that revenues and expenses be reported in the
proper period.
 Under the accrual basis of accounting, revenues are reported on the income statement in
the period in which they are earned.
 The accounting concept supporting the reporting of revenues when they are earned
regardless of when cash is received is called the revenue recognition concept.
 The accounting concept supporting reporting revenues and related expenses in the same
period is called the matching concept, or matching principle.
 Under the cash basis of accounting, revenues and expenses are reported on the income
statement in the period in which cash is received or paid.

The Adjusting Process

 Under the accrual basis, some of the accounts need updating at the end of the accounting
period for the following reasons:
o Some expenses are not recorded daily.
o Some revenues and expenses are incurred as time passes rather than as separate
transactions.
o Some revenues and expenses may be unrecorded.
 The analysis and updating of accounts at the end of the period before financial statements
are prepared is called the adjusting process.
 The journal entries that bring the accounts up to date at the end of the accounting period
are called adjusting entries.

Types of Accounts Requiring Adjustment

 Prepaid expenses are the advance payment of future expenses and are recorded as assets
when cash is paid.
 Unearned revenues are the advance receipt of future revenues and are recorded as
liabilities when cash is received.
 Accrued revenues are unrecorded revenues that have been earned and for which cash
has yet to be received.
 Accrued expenses are unrecorded expenses that have been incurred and for which cash
has yet to be paid.

Learning Objective 2: Journalize entries for accounts requiring adjustment.

Prepaid Expenses:
SLA’s supplies account has a balance of Php2,000 on the unadjusted trial balance. Some of these
supplies have been used. On December 31, a count reveals that the amount of supplies on hand is
Php 760.

Unearned Revenues:
SLA received cash amounting to Php360 for rent which represents three months rental from the
retailer.

Accrued Revenues:
SLA signed an agreement with Danker Co. on December 15 to provide services at rate of Php20
per hour. As of December 31, SLA had provided 25 hours of services. The revenue will be billed
on January 15.

Accrued Expenses:
SLA pays it employees biweekly. During December, SLA paid wages of Php950 on December
13 and Php1,200 on December 27. As of December 31, SLA owes Php250 of wages to
employees for 2 days work.

Depreciation Expense
 Fixed assets, or plant assets, are physical resources that are owned and used by a business
and are permanent or have a long life.
 As time passes, a fixed asset losses its ability to provide useful services. This decrease in
usefulness is called depreciation.
 All fixed assets, except land, lose their usefulness and, thus, are said to depreciate.
 As a fixed asset depreciated. A portion of its cost should be recorded as an expense. This
periodic expense is called depreciation expense.
 The fixed asset account is not decrease (credited) when making the related adjusting
entry. This is because both the original cost of a fixed asset and the depreciation recorded
since its purchase are reported on the balance sheet. Instead, an account entitled
Accumulate Depreciation is increased (credited).
 Accumulated depreciation accounts are called contra accounts, or contra asset
accounts.
 The difference between the original cost of the office equipment and the balance in the
accumulated depreciation—office equipment account is called the book value of the
asset (or net book value).

Learning Objective 3: Summarize the adjustment process.

Learning Objective 4: Prepare an adjusted trial balance.

Adjusted Trial Balance

 The purpose of the adjusted trial balance is to verify the equality of the total debit and
credit balances before the financial statements are prepared.